MacroMonitor Market Trends Newsletter
August 2016

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Reverse Mortgages

Tom Selleck, Robert Wagner and Henry Winkler: If you're of a certain age, you'll remember these actors from their breakthrough roles. But today, if you know them at all, you'll recognize these actors as spokespeople for companies advertising reverse mortgages, a financial product with a reputation of being somewhat unsavory and for use as a last resort only. However, recent changes to reverse-mortgage regulations and some new strategies for use in an integrated-retirement-income program may breathe new life into this marginal product. Currently, fewer than 0.5% of households have a reverse mortgage. Given the potential for this product, it makes sense to focus on households that are eligible by age (62 years or older), that own their primary home, and that have no retirement accounts or no fully vested pensions.

The red line in the figure shows households in which the primary head is 60 years old or older: The incidence of such households has increased in the past two decades—as the Boomers enter their sixties—from 32 million households to just fewer than 44 million. The purple line represents the number of these households that have no retirement accounts—no IRAs, Simples, SEPs, Keoghs, 401(k)s, 403(b)s, 457s, or indexed, fixed, or variable annuities. In addition, these households have no fully vested pensions. In spite of the population increase overall, the number of these households actually declined from 18 million in 1994 to a low of 12 million in 2010 to—now—fewer than 15 million in 2014. The blue line shows that a fairly consistent number of households (from about 8 million to 11 million) own their primary home.

The traditional reverse mortgage was by design for this last group of households: households that need a reliable income and that—outside their current employment, any retail savings, and Social Security—have no assets to draw upon. The good news is that in 2014, they have an average of $125,000 in equity (see the green bar). In the aggregate, this equity amounts to over $1 trillion. Reputation and stigma aside, the reverse mortgage may represent the only option for these homeowners.

The new regulations and retirement-income strategy are of particular value to households with heads age 60 or older who own their home and have some retirement assets but are uncertain that those assets will be adequate for their life expectancy. Although difficult to know how much in assets will be adequate because of the uncertainties of market returns, inflation, life expectancy, and lifestyle variations, these mass-market households with retirement assets could use a reverse-mortgage home equity line of credit to avoid drawing down their assets during years of poor market returns, extending the time for which these funds would be available. In addition to providing tax advantages, reverse-mortgaged HELOCs could serve, for example, to retrofit homes, to enable living in place, to pay for long-term care or supplemental insurance, for other major purchases such as travel, or to remain untouched so that the amount available actually increases as the value of the home increases with time.

The August Segment Summary—Potential Reverse-Mortgage Households—addresses the traditional target for reverse mortgages and highlights demographics, financial balance sheet, institutional use, and financial attitudes of households with few options besides a reverse mortgage in order to survive.